Finance Bill New Clause 4

Brooks Newmark speaks in favour of introducing benchmarks aimed at increasing efficiencies at HM Revenue & Customs especially in relation to VAT registrations and repayments.

Duty on HMRC to expedite VAT registration and repayment applications

Mr. Newmark: When the issue of timely VAT repayment was raised in Committee in the context of MTIC fraud, the Financial Secretary commended me for speaking with some passion on the subject-at least, I think it was a commendation. It will come as no surprise to him, then, that I want to return to it.

As my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) told the Public Bill Committee, the problems with timely VAT registration and repayment have been a matter of some interest to the Treasury Committee. The acting chairman and the director general of enforcement and compliance at HMRC both admitted to the Treasury Committee that VAT registration was an area in which HMRC was under considerable pressure.

However, my interest, or rather my passion, stems from the fact that I have seen the effect that the pursuit of MTIC fraud can have on a business when itcauses significant delay in VAT repayment. I therefore welcome new clauses 3 and 4, because they both improve parliamentary oversight and introduce some form of benchmarking in HMRC's treatment of VAT. However, the first depends on the second if it is to be effective. The value of scrutiny depends, to a large extent, on the existence of benchmarks and standards of reasonable behaviour. That is particularly important in respect of MTIC fraud.

First, there is a consensus that tackling MTIC fraud is necessary and beneficial. However, the unintended consequence of that consensus is that scrutiny becomes more challenging, because we must be careful that an attack on the effectiveness of the repayment system is not construed as an attack on anti-avoidance itself.

Secondly, the Government are fond of telling the House how fiendishly complicated MTIC fraud is and how HMRC is engaged in a running battle to outwitits perpetrators. The reasoning is that complication justifies delay. The logical outcome of the endless race between fraudsters and HMRC is that as complication increases, so must delay. That was the essence of the Financial Secretary's argument in Committee. He told me:

"Given the complexity involved, it is not surprising that the process of focusing on the trading patterns or traders that we suspect are most at risk can take some time." --[Official Report, Finance Public Bill Committee, 7 June 2007; c. 492.]

Nevertheless, there remains a point at which delay becomes unreasonable and unjustifiable, whatever the worthy objective behind it. The Financial Secretary cited a figure of 12 months for the completion of verification checks which had been accepted by the courts. If that is truly a reasonable and justifiable delay, let the Treasury specify it in an order, or let HMRC print it in a glossy brochure so that businesses know what to expect.

Thirdly, the Financial Secretary argued that HMRC's record on MTIC fraud is very good, showing that the Government's strategy on MTIC fraud is well focused. He cited the figure that we heard earlier, that only 1 per cent. of the VAT that had been withheld because of verification was found to be correctly claimed and repayable, but that statistic will be of little comfort to those who are caught up in investigation, and it has no direct bearing on whether HMRC can agree a timetable for verification and then stick to it.

I raised the issue in Committee because I was worried that HMRC might lack the resources that it needed to cope with the scale of MTIC fraud. Publicised time scales for VAT registration and repayment would assist resource management within the organisation. It would also be invaluable to businesses that rely on prompt VAT repayment in order to maintain a healthy cash flow.

One of my constituents was a director of a firm that was caught up in an MTIC fraud investigation. My constituent's company supplied mobile phones, and it had exports totalling £60 million in 2006. It waited some 10 months for a VAT repayment claim of£6.7 million to be met while "extended verification" procedures were carried out on its supply chain. Unfortunately, that wait did not have a happy outcome; on 17 January, the company went into administration due to the significant dent in operating cash flow represented by that £6.7 million, which is a substantial sum for a company with a £60 million turnover.

It is unfortunate to say the least that any company should be driven to the wall in those circumstances. I do not wish to second-guess HMRC's judgment on that particular case, but I do question the process. I suspect that the uncertainty of living month to month while investigations were carried out was the final straw for my constituent. He also told me that he did not think that any investigation was going on for much of those 10 months, as few of his suppliers were even contacted.

Proposed subsection (3) of the new clause would ensure that HMRC had an incentive to get a moveon, since running out of time would result in a determination in favour of the application. It is better that HMRC should run out of time than a company should go to the wall or go bust having run out of money. What the new clause does not do is prescribe a reasonable time scale. It is quite right that HMRC should, informed by all the relevant operational considerations, advise the Treasury on an appropriate time scale. Once in place, however, that time scale would introduce some accountability and get companies that are being investigated for MTIC fraud out of limbo.

My final word is a note of scepticism on proposed subsection (5) concerning force majeure. As we heard earlier, Mr. Eland, the director general of enforcement and compliance at HMRC told my hon. Friend the Member for South-West Hertfordshire that HMRC was

"getting better IT backup to carry out some of the fraud checks so that we can do the checking more quickly."

Given the Government's woeful record on IT projects, I hope that the routine IT failure will not be brought within their ambit under force majeure.

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LATER IN THE SAME DEBATE

John Healey: .... If the hon. Member for Braintree can let me have the name of the company-we have discussed it before and I have caused inquiries to be undertaken, as I undertook to do-for the purposes of taxpayer confidentiality and to ensure that I have the right company, I can, with that confirmation, get back to him on the current position.

Mr. Newmark: I appreciate the Financial Secretary's comments, but the spirit in which I was trying to make my points was not so much about the case itself as about the process that it had to go through, which lasted rather a long time. That was the thrust of my argument, rather than the rights and wrongs of HMRC's judgment on my particular constituent's case.

6.45 pm